What I don't get is, given the amount of people currently loving their smartphones, clearly there is a desire for touchscreen interfaces. So why so many declaring it'll fail?
Because using a smart phone app is different from controlling traditional video games.
There is a reason why touch screens have not replace keyboards on laptops and desktop PCs. You don't want to write a book on a virtual keyboard. You probably don't want to play Call of Duty on virtual buttons.
As others have pointed out, the biggest issue is the impossibility to blindly know where the buttons are. This would be a smaller issue if the photo shows the handheld, since in this case your eyes would be on the screen the entire time. If the image shows the home console controller—or a handheld that also works as a home console controller—then the problem of using it blindly would be a problem. The analog sticks might server as a haptic reference point, but I am skeptical.
I am open to this thing. As a handheld it probably makes sense. But I remain skeptical if the home console will use the same concept. I never liked how the GamePad on the Wii U forced you to change your focus between TV and the controller in your lap all the time. This thing—again, if it is a controller for the home console, and not a handheld—looks like it would make that issue even worse.